Gold – Another Post-Crash Update

A Possible Bullish E-Wave Interpretation

When looking at the chart of gold in dollars, it is obvious that a number of bearish interpretations and chart targets can be derived from it. We were thinking about how to go about an Elliott Wave count of the chart, and one possibility that suggests itself is that ‘wave 1 down’ was a rare leading diagonal, and that after a wave 2 correction, we are now somewhere in wave 3 down.

However, because leading diagonals are so rare, we have to consider whether a bullish interpretation of the chart is also possible, especially in view of the panic volume at the lows and the extremes in bearish sentiment that were recorded (more on those further below).

Here is what we have come up with. Please note, we do not claim that this is a ‘correct’ interpretation – we merely note that it is a possibility that would conform with Elliott Wave rules.


Gold’s Elliott wave count, the bullish possibility- click to enlarge.


One caveat is that wave ‘C’ may not be finished. There could be further subdivisions (and hence additional declines) without necessarily invalidating the concept as such. Apart from sentiment, one further consideration that lends support to the above interpretation is the fact that the entire movement since the 2011 high does look corrective in nature. We can detect a plethora of three-wave moves, but no big 5 wave moves except those in the proposed wave C.

Sentiment and the CoT Report

It seems almost superfluous to mention it, but sentiment on gold has become even more bearish than it already was prior to the recent crash. Luckily this is something that can be quantified, and we show a few of the most recent relevant data points below.


A new low in Hulbert’s HGNSI (gold newsletter sentiment indicator – at minus 37.5. This means that on average, gold timers now recommend a 37.5% net short position in gold. Given the fact that a number of newsletter writers are perma-bulls, this is quite an astonishingly high percentage- click to enlarge.


Gold, public opinion – this indicator merges several prominent sentiment surveys into a single number. A new multi-year low in the bullish consensus has been recorded- click to enlarge.


Now let us briefly discuss the commitments of traders report. Several observers have argued that the fact that the net position of large speculators has actually remained long and has in fact become slightly more ‘net long’ than it was prior to the plunge, is bearish. For example, well-known internet gold pundit Clive Maund writes: “…despite the massive drop in price, the COT structure is little changed. This is viewed as strongly bearish”.

This interpretation is erroneous. The group that is most knowledgeable about gold‘s future direction are in fact the big speculators. It would have been very bearish if they had added to their gross short positions. The fact that they have covered a good portion of their shorts is bullish, not bearish. It means they perceive less downside risk than before, and we would note that Mr. Maund previously regarded their growing gross short position as bullish; it wasn’t, and we mentioned at the time in these pages that we felt it was a major fly in the bullish ointment. We noted that obviously, a growing speculative short position could add fuel to any developing rally. However, we then added this caveat, which proved to be prophetic in hindsight:

 

“However, we hasten to add that one should definitely not assume that just because these short positions have risen, a market rally is necessarily imminent. In fact, it would be a very bad sign if money managers became so bearish as to flip over to a net short position.

It is short term bullish when gross and net long positions are reduced in a correction in an uptrend, but it is far less bullish when the decline in the net long position owes mostly to an increase in shorts.

Let us not forget: the big speculators are the group that tends to be right about gold’s major underlying trend. Their growing skepticism is not an unalloyed positive sign as many other writers currently maintain. Quite to the contrary, it is a reason for concern. Bulls would want to see this gross short position reduced as quickly as possible.”

In so many words, those who believe that the commercial hedgers are the ‘smart money’ in gold simply have it wrong. This is not meant to detract from the otherwise often very good quality of Mr. Maund’s technical observations. We only have a beef with his interpretation of the COT report as well as his misconception about what the ‘bullish percent’ chart of the GDM or the HUI actually depicts (this chart does not show us the degree of ‘bullish sentiment’, but the percentage of gold stocks that are on a Point & Figure buy signal).

There has been another positive development in the CoT report, and that was the ongoing liquidation of long positions by small traders. Historically, this is a group of traders that contributes to a positive outlook if its net long position is as small as possible.


Commitments of traders in gold futures: big speculators have covered some of their shorts, small speculators have liquidated longs. This is bullish, not bearish- click to enlarge.


What bulls would want to see from here on out is a further reduction in big trader shorts, ideally to a level of between 30 to 40,000 contracts gross or less.

Gold and the Rand

The South African Rand has weakened further as gold and platinum were clobbered, with the result that the gold price in Rand terms remains within its  trading range of the past few years. As we write these words, Harmony Gold (HMY) is up by nearly 13% on the day, trading at a still very low $5.20 per share. The huge gap between HMY and the Rand gold price can be seen below:


Gold in Rand and the share price of HMY (green line) – eventually, this gap should close – click to enlarge.


As a matter of fact, Harmony has managed to keep cost increases in check last quarter due to the weakening Rand. The same can probably be expected from other South Africa based mining operations as well – a gradual improvement in the escalation of costs. We think that the current prices of these shares represent an extraordinary opportunity, but obviously everyone will have to do his own due diligence on that point.

There are numerous risk factors, not the least of which is the marginal nature of South African deep level mining operations. They would not be able to cope with a large decline in the gold price. On the other hand, this means also that they sport extraordinary leverage to a rising gold price – it would not be incorrect to refer to them as cheap call options on gold.

Source: http://www.acting-man.com/?p=22854

Gold Panicky Response to Fed Sets Up Bullish Potential

Just who does the Fed think it is kidding, making noises about choking off QE and Treasury purchases? Any serious attempt to do this at the eleventh hour would crash both the bond and stockmarkets and send interest rates skyrocketing, and they know it – it would be like the Captain of the Titanic grabbing a bullhorn and announcing “You see that Iceberg over there? – we’re going to head straight at it” – actually he might as well have, for all the difference it made. So it almost looks like they were engaging in a bit of “tree shaking” for their crony pals, especially with respect to the resource sector. In any case, when it comes to QE they have got some serious competition this year with Japan entering the fray as the new big QE kid on the block, so it hardly looks like they are going to bow out of the QE game at this stage. There is something tragi-comic about the way most investors hang on to the Fed’s every word, as if they were gods instead of what they really are which is an elite racket who have painted themselves into a corner after years of malfeasance.

So the sharp shakeout late last week, in a panicky response supposedly due to the Fed freaking out investors, looks to have thrown up another opportunity to accumulate more PM sector holdings ahead of the next uptrend and as we will now see, there is strong evidence that Friday’s intraday plunge marked the end of the correction in force from early October.

As we can see on our 6-month chart for gold below, Friday’s steep intraday drop brought the price down exactly to the bottom of our earlier delineated channel and just look what happened there – it bounced strongly on robust volume to close little changed on the day, leaving a fine large “bull hammer” on its chart, and it is no coincidence that silver did likewise. This large bull hammer is a sign that the downtrend has now run its course, and that a reversal is occurring. Notice how the C-wave decline of the 3-wave A-B-C correction matches the A-wave in magnitude, approx. $120. This looks like the final low and gold should now ascend from here.

Gold 6-Month Chart

The 7-year chart for gold, which shows almost no technical change from the last update, reveals that it remains well within its long-term uptrend and so there is little for long-term investors in gold to worry about – substantial investors in gold can comfortably settle into their all-important leisure pursuits such as fishing, or hanging out in Las Vegas. The only proviso is that it is considered prudent to maintain a stop below the key support at $1500, to guard against the lurking risk of a deflationary implosion that could result from another collapse in the still extremely fragile banking system, which would take down most everything.

Gold 7-Year Chart

The latest COT chart shows that Commercial short and Large Spec long positions are in middling ground after having contracting significantly in recent weeks, and these positions are not at levels that would prevent a sizeable rally developing from here.

Gold COT

The latest Hulbert Gold Sentiment chart, courtesy of www.sentimentrader.com shows that sentiment has worsened considerably since the last update, which is really good news for bulls, as it means that the mob are bearish. This sentiment indicator is now at the sort of levels that usually coincides with a bottom and a reversal.

Hulbert Gold Sentiment

An ongoing riddle in relation to gold is the outlook for the dollar. At the end of last year we had anticipated a rally in the dollar index on the site, despite its looking like a Head-and-Shoulders top was completing in it, due to the weight of public bearishness and the big Commercial long position that had built up. Last week the dollar did rally strongly as we can see on its 18-month chart below.

US Dollar Index 18-Month Chart

The latest dollar COT chart, courtesy of www.sentimentrader.com, remains strongly bullish, however, which ordinarily would be a negative for gold. However, this may be the harbinger of further mayhem and strife in Europe, in which case the dollar and gold could rally in tandem.

US Dollar COT

The other much more dangerous possibility that we need to keep in mind is that the high Commercial long position in the dollar may be a warning of an imminent dash to cash that could be triggered by the sudden re-emergence of a major banking crisis. Despite ongoing bailouts and handouts of almost free money many banks’ balance sheets are in tatters, and they are stuffed with bad and deteriorating assets. The situation could rapidly get completely out of control and spiral into a crisis and deflationary implosion that would make 2008 look like a walk in the park. I’m going to digress here to tell you a story that should serve to make clear both the magnitude and unpredictability of this crisis.

When I was a kid there was a film about 2 hardened criminals serving long jail terms, who were offered a pardon on condition that they drive 2 trucks of the dangerously unstable nitroglycerine over the mountains to a dam construction site where it was needed. These guys were sweating buckets as they eased their trucks slowly over bumps and potholes. This stuff could explode at any moment if shaken about too much. One driver wasn’t careful or fortunate enough and his truck exploded and he didn’t even have time to think about saying his prayers. The other made it. This is the kind of dangerous instability that exists with respect to the banking system and derivatives right now. The Central Banks are setting a course for hyperinflation – that is where we are headed – but if they fail to shore up the banks and prevent a collapse – and they may be physically unable to prevent it due to the magnitude of bad asset decay – we could see an extremely rapid implosion in which virtually everything craters, but the dollar soars due to mass liquidation – this may be what the high Commercial long position in the dollar is warning of. This implosion could happen at any time with very little warning and it is why you need to keep $1500 gold and $25 – $26 silver in mind as a line in the sand – if these levels fail be ready to be stopped out or hedge. Otherwise, as long as the truck doesn’t explode and the game can be kept going, gold and silver look set to embark on another major upleg soon.

By Clive Maund
CliveMaund.com

Gold Panicky Response to Fed Sets Up Bullish Potential

Just who does the Fed think it is kidding, making noises about choking off QE and Treasury purchases? Any serious attempt to do this at the eleventh hour would crash both the bond and stockmarkets and send interest rates skyrocketing, and they know it – it would be like the Captain of the Titanic grabbing a bullhorn and announcing “You see that Iceberg over there? – we’re going to head straight at it” – actually he might as well have, for all the difference it made. So it almost looks like they were engaging in a bit of “tree shaking” for their crony pals, especially with respect to the resource sector. In any case, when it comes to QE they have got some serious competition this year with Japan entering the fray as the new big QE kid on the block, so it hardly looks like they are going to bow out of the QE game at this stage. There is something tragi-comic about the way most investors hang on to the Fed’s every word, as if they were gods instead of what they really are which is an elite racket who have painted themselves into a corner after years of malfeasance.

So the sharp shakeout late last week, in a panicky response supposedly due to the Fed freaking out investors, looks to have thrown up another opportunity to accumulate more PM sector holdings ahead of the next uptrend and as we will now see, there is strong evidence that Friday’s intraday plunge marked the end of the correction in force from early October.

As we can see on our 6-month chart for gold below, Friday’s steep intraday drop brought the price down exactly to the bottom of our earlier delineated channel and just look what happened there – it bounced strongly on robust volume to close little changed on the day, leaving a fine large “bull hammer” on its chart, and it is no coincidence that silver did likewise. This large bull hammer is a sign that the downtrend has now run its course, and that a reversal is occurring. Notice how the C-wave decline of the 3-wave A-B-C correction matches the A-wave in magnitude, approx. $120. This looks like the final low and gold should now ascend from here.

Gold 6-Month Chart

The 7-year chart for gold, which shows almost no technical change from the last update, reveals that it remains well within its long-term uptrend and so there is little for long-term investors in gold to worry about – substantial investors in gold can comfortably settle into their all-important leisure pursuits such as fishing, or hanging out in Las Vegas. The only proviso is that it is considered prudent to maintain a stop below the key support at $1500, to guard against the lurking risk of a deflationary implosion that could result from another collapse in the still extremely fragile banking system, which would take down most everything.

Gold 7-Year Chart

The latest COT chart shows that Commercial short and Large Spec long positions are in middling ground after having contracting significantly in recent weeks, and these positions are not at levels that would prevent a sizeable rally developing from here.

Gold COT

The latest Hulbert Gold Sentiment chart, courtesy of www.sentimentrader.com shows that sentiment has worsened considerably since the last update, which is really good news for bulls, as it means that the mob are bearish. This sentiment indicator is now at the sort of levels that usually coincides with a bottom and a reversal.

Hulbert Gold Sentiment

An ongoing riddle in relation to gold is the outlook for the dollar. At the end of last year we had anticipated a rally in the dollar index on the site, despite its looking like a Head-and-Shoulders top was completing in it, due to the weight of public bearishness and the big Commercial long position that had built up. Last week the dollar did rally strongly as we can see on its 18-month chart below.

US Dollar Index 18-Month Chart

The latest dollar COT chart, courtesy of www.sentimentrader.com, remains strongly bullish, however, which ordinarily would be a negative for gold. However, this may be the harbinger of further mayhem and strife in Europe, in which case the dollar and gold could rally in tandem.

US Dollar COT

The other much more dangerous possibility that we need to keep in mind is that the high Commercial long position in the dollar may be a warning of an imminent dash to cash that could be triggered by the sudden re-emergence of a major banking crisis. Despite ongoing bailouts and handouts of almost free money many banks’ balance sheets are in tatters, and they are stuffed with bad and deteriorating assets. The situation could rapidly get completely out of control and spiral into a crisis and deflationary implosion that would make 2008 look like a walk in the park. I’m going to digress here to tell you a story that should serve to make clear both the magnitude and unpredictability of this crisis.

When I was a kid there was a film about 2 hardened criminals serving long jail terms, who were offered a pardon on condition that they drive 2 trucks of the dangerously unstable nitroglycerine over the mountains to a dam construction site where it was needed. These guys were sweating buckets as they eased their trucks slowly over bumps and potholes. This stuff could explode at any moment if shaken about too much. One driver wasn’t careful or fortunate enough and his truck exploded and he didn’t even have time to think about saying his prayers. The other made it. This is the kind of dangerous instability that exists with respect to the banking system and derivatives right now. The Central Banks are setting a course for hyperinflation – that is where we are headed – but if they fail to shore up the banks and prevent a collapse – and they may be physically unable to prevent it due to the magnitude of bad asset decay – we could see an extremely rapid implosion in which virtually everything craters, but the dollar soars due to mass liquidation – this may be what the high Commercial long position in the dollar is warning of. This implosion could happen at any time with very little warning and it is why you need to keep $1500 gold and $25 – $26 silver in mind as a line in the sand – if these levels fail be ready to be stopped out or hedge. Otherwise, as long as the truck doesn’t explode and the game can be kept going, gold and silver look set to embark on another major upleg soon.

By Clive Maund
CliveMaund.com